The Indian tax environment continues to consolidate its position as one of the most demanding in terms of transfer pricing, particularly for multinational groups headquartered in the United States with significant operations in India. The tax authority’s focus is not limited solely to determining profit margins, but increasingly extends to the consistency between intercompany agreements, operational reality, and underlying economic evidence.
In this context, intra-group agreements are no longer simple contractual instruments but have become critical elements of tax defense. Companies operating in India must demonstrate that transactions with related parties respond to a clear economic logic, generate identifiable benefits for the local entity, and are properly valued in accordance with the arm’s length principle.
An increasingly substance-oriented tax approach
Transfer pricing rules in India are formally aligned with OECD guidelines; however, their practical application is characterized by a high level of scrutiny and interpretations that privilege economic substance over contractual form. This is particularly relevant in transactions such as the provision of intra-group services, the use of intellectual property, the allocation of corporate costs, and financial transactions between related entities.
For the Indian tax authority, it is not enough to have a contract supporting an intercompany charge. It is essential to demonstrate that the services were actually provided, that they contributed tangible or identifiable value to the recipient entity, and that the price paid corresponds to what an independent third party would be willing to pay in comparable circumstances. The absence of any of these elements often leads to tax adjustments, even when the transaction has a legitimate business justification.
The challenge of aligning contracts, transactions, and documentation
One of the main points of friction in transfer pricing audits in India arises when there is a disconnect between what is established in intercompany agreements and what occurs in practice. It is common to find generic contracts, drafted at the corporate level, that do not accurately reflect the functions performed by the Indian subsidiary or the risks it actually assumes.
From a tax perspective, this inconsistency significantly weakens the taxpayer’s position. Audit teams jointly analyze contracts, financial statements, management reports, billing flows, and operational evidence (emails, reports, deliverables, time records), seeking to confirm that there is a real correspondence between all these elements.
When such consistency cannot be demonstrated, the authorities often question the deductibility of intercompany charges or recalculate the profit margins of the Indian entity, increasing the local tax base.
Areas of greatest exposure to tax risk
In practice, there are certain types of transactions that receive priority attention from the Indian tax administration. These include intra-group support or management services, especially those described in broad or vague terms. In these cases, the authority expects to clearly identify what services were provided, who performed them, how their benefit was measured, and what basis was used for their valuation.
Another recurring focus of review is royalties for the use of intellectual property, where concrete evidence is required that the Indian entity effectively uses the intangibles, obtains economic benefits from their exploitation, and does not duplicate functions that it already performs autonomously. Intragroup financial transactions, particularly loans and guarantees, are also subject to detailed analysis, both in terms of interest rates and contractual conditions.
The importance of a comprehensive compliance strategy
Given this scenario, effective transfer pricing compliance cannot be approached solely from a documentary perspective. It requires a comprehensive strategy that combines technical analysis, internal governance, and a deep understanding of the group’s business model.
The first step is to identify and map all intra-group transactions involving the Indian entity, assessing their economic relevance and level of tax exposure. Based on this, it is essential to review whether the intercompany agreements adequately reflect the functions, assets, and risks of each party, and whether the valuation methods applied are consistent with the nature of the transactions.
This analysis must be complemented by a clear policy for generating and preserving evidence, which allows for objective demonstration of the provision of services, the use of intangibles, or the reasonableness of the agreed financial terms. Experience shows that solid, well-structured documentation significantly reduces the likelihood of adverse adjustments during an audit.
Internal coordination as a key success factor
One aspect that is often underestimated is the need for coordination between the different areas of the business group. Transfer pricing compliance is not the sole responsibility of the tax department; it directly involves finance, operations, legal, and, in many cases, senior management.
A lack of internal alignment often results in inconsistencies that are obvious to the tax authority. Conversely, when there is clear governance of intercompany transactions, with defined roles and periodic review processes, the group is in a much stronger position to defend its transfer pricing policies.
Financial and reputational impact of non-compliance
The consequences of poor transfer pricing management in India can be significant. In addition to adjustments to taxable income, companies are exposed to financial penalties, interest, and, in some cases, protracted disputes that demand considerable resources in terms of time and legal costs.
Furthermore, the risk of double taxation increases when adjustments made in India are not automatically reflected in the parent company’s jurisdiction. While dispute resolution mechanisms such as mutual agreement procedures or advance pricing agreements exist, they require rigorous technical preparation and a well-defined strategy.
Strengthen your tax position with a robust transfer pricing strategy
Increasing scrutiny of intra-group transactions at the international level requires multinational groups to maintain consistent alignment between their intercompany agreements, operational reality, and the economic evidence that supports them. Inadequate transfer pricing management can lead to significant tax adjustments, penalties, and contingencies that directly impact the profitability and sustainability of the business.
Working with a company specializing in transfer pricing allows you to identify risks, strengthen your tax defense, and structure policies in line with international standards. Within this framework, TPC Group advises multinational groups on the design, review, and documentation of their intercompany transactions, contributing to efficient and technically sound tax management.
Source: India-Briefing